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Why we need to tackle the expensive truth about pensions

09/11/2020 Posted by IAPF | Comments(0)

A new Commission on Pensions will be established to make recommendations on the age that people will qualify for the State pension.

This issue of The expensive truth about pensions has proved politically contentious and there are a number of uncomfortable truths why we need to tackle it.


1. Many workers don’t have a pension.

Around 60pc of workers have a pension other than the State pension. But just 35pc of private sector workers do, so most of them will rely on the State pension in old age. This means their income won’t be worth much more than a third of the average wage.

2. You can’t depend on the State pension keeping its value.

In future, the State pension could be worth far less than it is now. A full pension is €248.30 a week or roughly €12,900 a year. Increases – if they are given – are announced on budget day but recent fiver-a-week giveaways have dried up.

The Government had big plans to link pensions to wages or inflation to give pensioners more certainty, but they seem to be shelved. However, the biggest threat to the value of the pension is whether the State can afford to pick up its total pension bill in the years to come.

Even before Covid, Government officials predicted a huge deficit in the fund the State pension is paid from. This is largely because the population is ageing and there will be far fewer workers to pay into it.

A Government roadmap said the social insurance fund is forecast to accumulate a potential deficit of up to €400bn over the next 50 years.

People may also be a lot older before they qualify for the State pension as well. Currently, you can draw it at 66. It was due to rise to 67 next year and 68 in 2028 in a bid to cut costs.

This is now up in the air because the Government has kicked a decision down the road. The newly-established Pensions Commission is tasked with coming up with recommendations on the pension age by June.

3. Private sector pensions carry far more risk than public sector ones.

Many private sector workers in what were supposed to be guaranteed pension schemes suffered due to large deficits during the financial crisis.

Some who thought they were on a winner in defined benefit schemes faced the reality of spending much of their golden years looking for bargains in Aldi rather than timeshares on Greek islands.

Although a lot of schemes are fully funded again, many workers have seen drastic cuts in benefits. Most of the newer generation of workers are in less lucrative defined contribution schemes and average annual pensions are around the €6,000 mark.

In contrast, public servants are in more generous defined benefit schemes whose benefits have been honoured. Many have pensions based on their final salary that increase with pay rises, and get lump sums on retirement.

A less generous scheme was introduced after 2013 – although it is still defined benefit.

4. The pandemic is a major setback to your chances of a better pensions set-up.

Hope has been held out for younger workers without pensions, but with time on their side.

In 2022, a new national pension scheme is supposed to become reality. It has been rolled out in the UK, but despite decades of promises by governments has not seen the light of day here yet. The scheme would cover all workers without a supplementary pension.

They would be enrolled whether they liked it or not, although they could choose to opt out.

But those it would benefit most in sectors with low levels of pension coverage like retail and hospitality have been worst hit by the public health restrictions.

Therefore, it’s probably not a good time for them to start paying contributions, even if their employer and the State are also going to chip in.

When asked about the pension plan this week, the Department of Social Protection was vague about a start date.

“While the Roadmap for Pensions Reform 2018 to 2023 provided for the development and implementation of an automatic enrolment retirement savings system by 2022, this Government recognises the exceptional strain that both employers and employees are now under as a result of the Covid-19 emergency,” a statement said. “Therefore, the Government will now seek to gradually deliver an auto enrolment system”.

5. They’re expensive.

You need to put a lot of money aside to have a good lifestyle in retirement, says Jerry Moriarty, chief executive of the Irish Association of Pension Funds. But he says suggestions that people pay about 15pc of their salary in can put them off, and many do nothing as a result.

“On average people start work later in life at between 23 and 25, having gone through transition year or university,” he said.

“If you are planning on working for 40 years from 25 to 65, and on average live until 85, you will have to save enough in those 40 years to keep you when you have no income for 20 years

“Unless you start saving from day one, you suddenly have 25 or 30 years to cover you for 20 years.”

Otherwise, he said, you will not have the kind of retirement you’d like, or need to keep working longer.

He said those who end up with better pensions usually have an employer who contributes, but a growth in gig economy work means many workers have to fund their own.

Read the original article here

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